It’s becoming increasingly likely that 2008 will go down in history as the year the Second Great Depression began.

The unraveling started with the subprime mortgage fiasco and is spreading fast. The total value of all US$-based mortgage bonds is $10.4 trillion, of which 30 percent is now expected to be lost in defaults and property devaluation. That’s $3.2 trillion in losses.

Trillions more are likely to evaporate from the related derivatives markets.

It’s true that the global economy is pretty big, and a few hundred billion get lost under sofa cushions from time to time (as happened during the savings and loan crisis of the 1990s), and still, life goes on. But when we’re discussing trillions of dollars (with a “T”), we’re talking real money.

Such things have happened before (in 1833, 1837, 1857, 1907, 1920, and 1929), but this time it’s different. Now the problem is not just financial mismanagement; there is a deeper instability: the global economy is based on a fundamentally unsustainable exploitation of depleting natural resources, and that whole system is teetering. In his essay, “Barreling into Recession: How Oil Burst the American Bubble,” Michael Klare points out that

“The economic bubble that lifted the stock market to dizzying heights was sustained as much by cheap oil as by cheap (often fraudulent) mortgages.”

“The Oil Age opened 150 years ago, releasing a flood of cheap energy, such that today’s production is equivalent in energy terms to 22 billion slaves working around the clock. The resulting economic prosperity allowed the banks to lend more than they had on deposit, confident that Tomorrow’s Expansion was collateral for To-day’s Debt. It sounds a rather dubious principle but worked well enough during the First Half of the Oil Age allowing at least some countries to reap great prosperity. The Second Half now dawns, and being characterized by falling supply, effectively removes the Collateral for debt. . . . Whereas the post-peak physical decline of oil . . . is only gradual, . . . the perception that past economic growth must now give way to contraction can come in an instant, prompting radical changes in the financial world.”

So, as the oil drains away, the view is all downhill from here. A Depression is, well, depressing even to think about, much less to live through.

But wait a moment. For anyone with an ecological sensibility, the prospect of economic contraction has a silver lining. In a recent e-mail message, UBC Professor of Human Ecology Bill Rees summed up our collective situation this way:

“To raise the human enterprise ever further from thermodynamic equilibrium, we must degrade and dissipate ever-greater quantities of available energy and material resources extracted from the ecosphere. We have passed the point where the ecosphere can provide sustainably all that we are extracting. Resources are depleted; entropy accumulates. In effect, techno-industrial society has become pathologically parasitic on nature.”

The implication is clear: if we hope to survive as a species, and if there is to be hope for millions of other creatures, we need to shrink the human enterprise. Economic contraction may be bitter medicine, but it’s part of the cure for what ails our planetary home.

However, we can manage this contraction either foolishly or intelligently.

A foolish management of economic contraction would entail burning the biosphere for alternative fuels; propping up the banks and other financial institutions that created the mortgage mess, without ever re-examining the wisdom of growth-based economics; and responding to human privation and misery with repression and war.

Intelligent management would start with an explicit commitment to redesign the global economy to run with less. We would assess ecosphere resources and identify a humane, equitable path toward gradual reduction in population and total consumption levels. We would focus on those aspects of life that bring us increasing satisfaction without requiring more inputs of energy and materials. We would re-acquaint ourselves with the values and virtues of community, self-sufficiency, and modesty. We would redesign our cities to eliminate cars, while developing renewable energy sources and educating a new generation of ecological farmers.

If we handle this well, the medicine of contraction will leave Nature intact and humanity in a state of greater happiness, equity, and peace.

We don’t have much choice regarding whether a Depression will ensue. But a great deal depends on how we respond. It’s not too soon to start that discussion.

Richard Heinberg is the author of "The Party’s Over" and "Peak Everything." He is a Senior Fellow of the Post Carbon Institute and lectures widely on sane responses to fossil fuel depletion.